The 2018 Special Appropriation Bill for allocating R5bn to SAA was presented by Treasury. The R5bn would only be used to assist SAA to pay guaranteed debts that are coming due on 30 November 2018 but SAA would still be insolvent. It will continue making losses until 2020/21. SAA's identified risks are associated with oil price increase, the exchange rate and lack of management skills. The SAA board and management are implementing a five-year turnaround plan which focuses on revenue stimulation, network optimisation, restructuring organisational design, reviewing supply chain and South African Airways Technical (SAAT) business processes. SAA is flying routes that are profitable and the frequency for certain routes have been reduced. Domestic and regional profitability is looking up bit international routes are still problematic.
The Committees expressed numerous concerns about SAA especially that it continued to get bailouts and what was the difference between the old plans and the new turnaround plan. If Treasury acknowledged that SAA is insolvent it meant it is trading recklessly in terms of the Companies Act. The Board reported that to turn around SAA, R21.7bn must be injected into the airline but this cannot be done at once. The R21.7bn consists of R9.2bn to cover old debts that will mature next year in March and R12.5bn for working capital.
National Treasury, the Department of Public Enterprises (DPE) and South African Airways worked hard to convince the Select Committee and Standing Committee on Appropriations to approve the R5bn to SAA. However, the teams were unable to answer all the probing questions and the Committee requested the information in writing by 23 November.
In the next briefing, the 2018 Adjustments Appropriation Bill provides appropriation adjustments for various government departments. The mid-year adjustment budget consists of all unforeseeable or unavoidable economic and financial events. The adjustments budget is allowed by the Public Finance Management Act for emergencies to shift funds between and within votes; roll over unspent funds from the preceding financial year or utilise unspent funds under a main division of a vote to defray increased expenditure in another main division. National Treasury proposed an allocation of:
▪ R159.6 million to the Department of Cooperative Governance and Traditional Affairs for post-disaster construction and rehabilitation of houses due to floods.
▪ R100.1 million to the Department of Human Settlements for post-disaster reconstruction and rehabilitation of housing and human settlements.
▪ R30 million to the Department of Public Works for state funerals.
▪ R1.2 billion to South African Express Airways
▪ R2.9 billion to South African Post Office.
Members expressed concern about the increasing debt servicing costs and said Treasury must devise a plan to deal with this. Treasury pointed that the major factors that increased the debt service costs were the volatile exchange rates, the VAT refunds, and the unwillingness of investors to take up foreign bonds. The Members expressed concern at the allocation of R30 million for state funerals and asked if there is policy on state funerals and asked if one state funeral costs R10 million.
Members were disappointed about the lack of information on the R1.2bn given to SA Express Airways which was to repay a state guaranteed debt. The SAX financial statements must be provided to them and the projected revenue and expenditure for the next 12 months and if it was able to continue operating. The Committees directed Treasury to prepare a report on SA Express for informed decision making.
Five departments had funds rolled over from the previous year such as:
▪ R1.3m DBE Eastern Cape learner and teacher support materials and Northern Cape special care centres.
▪ R18.4m for Department of Social Development for substance abuse centre operations in Northern and finalisation of the construction of a substance abuse centre in the Free State.
▪ R118.5m for Department of Energy for procurement of official vehicle; solar water heater project; non-grid oversight, monitoring and evaluation.
Members expressed disapproval that DoE spent R59 million more than the R200 million allocated for the nuclear programme. Members asked why DSD was failing to utilise the money allocated for child support grants. Committees asked why R17 million from the Jobs Fund was not used given the high unemployment and about the rolling over of R800 000 for an official vehicle plus who received the vehicle. They asked why the Department of Police was unable to spend its budget considering the high crime rate.
Self-generated revenue would be allocated to some departments. Home Affairs (DHA) required approval for self-financing of R1.1bn generated from issuing of ID documents and passports, while the Department of Correctional Services require approval for R0.5 million from the hiring out of offender labour.
The Committees were told the 2018/19 budget appropriation was R814bn. The unforeseeable expenditure, roll-overs, self-financing, ear marked expenditures and declared savings amounted to R12 billion. Therefore the adjusted appropriations amount was R826 billion. However, other funds were reserved for contingencies and drought relief. As a result, the 2018/19 appropriation was adjusted by R3.764 billion.
The Chairperson, Ms Y Phosa (ANC) said that from National Treasury, SAA and Department of Public Enterprise should motivate why Parliament should approve the adjustments and those virements which can only be approved by Parliament according to Section 43 of the Public Finance Management Act (PFMA). She stressed that according to the Money Bills Act, the two Committees will hold public hearings before these Bills are approved.
Adjustments of Appropriation Bill: briefing by National Treasury
Ms Mampho Modise, Treasury Deputy Director General: Public Finance, said the mid-year Adjustment Budget consist of all unforeseeable or unavoidable economic and financial events affecting the fiscal targets set by the annual budget. In terms of section 30 of the PFMA, adjustments budget are allowed for emergencies for shifting of funds between and within Votes. The adjustment budgets may provide for the roll-over of unspent funds from the preceding financial year (FY) or utilising of unspent funds under a main division of a vote to defray increased expenditure in another main division.
Shifts of allocated expenditure and other adjustments are subject to the PFMA and its regulations.The adjustments budget serves both to effect necessary changes and to contribute to in-year oversight and management.
The structure of the Bill consists of a Vote purpose and main division (programme) within a vote. The adjustments to allocations are stated in terms of current payments; transfers and subsidies; payments for capital assets and payments for financial assets. The allocations marked with an (*) refer to specifically and exclusively appropriated amounts such as compensation of employees and conditional grants.
To determine whether something is unforeseeable expenditure that could not be anticipated at the time of the budget, Treasury looks at spending that was unknown when the budget was finalised but could not be accommodated in the allocations at the time. Treasury will consider spending increases due to tariff adjustments and price increases and spending to extend existing services or create new services that are not unforeseeable and unavoidable.
The following items were identified and approved by Treasury as being unforeseeable and unavoidable:
▪ Post-disaster reconstruction and rehabilitation after floods within the Department of Cooperative Governance and Traditional Affairs ( R159.6 million)
▪ Official state funerals for Department of Public Works (R30 million)
▪ Post-disaster rehabilitation of schools for the Department of Basic Education (R175.8 million)
▪ Post-disaster reconstruction and rehabilitation of hospitals for the Department of Health (R199.5 million)
▪ Post-disaster reconstruction and rehabilitation of three South Africa Social Security Agency buildings in the eThekwini municipality for the Department of Social Development (R2.2million)
▪ Post-disaster reconstruction and rehabilitation of farms for Department of Agriculture, Forestry and Fisheries (R1.3)
▪ Post-disaster reconstruction and rehabilitation of housing and human settlements for Department of Human Settlements (R100.1 million).
The Minister of Finance announced during the 2018 Budget Speech that funding for recapitalisation of state owned entities (SOEs) will be allocated. South African Express Airways (SAX) will get R1.2bn and South African Post Office (SAPO) receive R2.9 billion. There are conditions for the money to be allocated. For instance, the R1.2bn given to SAX can only be used to pay a state guaranteed debt.
The Minister said in his budget speech that R3.4bn will be allocated for drought relief to: COGTA; Agriculture, Forestry and Fisheries; Environmental Affairs, Water and Sanitation. Also departments that have sound infrastructure projects will receive additional funding. As a result, Treasury proposed that R1.6bn should be allocated to the following projects: planning and appraisal of infrastructure projects for Treasury; school infrastructure backlogs grant for basic education; student housing for higher education; Limpopo Central Hospital; City of Cape Town MyCiTi bus rapid transit system and iThemba Laboratory. More so, the Minister stated that money will be allocated to commissions of inquiry with R386 million allocated for State Capture while R22.9 million will be for the tax administration.
There are funds that were shifted from one vote to another. For instance, R30.7 million was transferred to the Department of Planning, Monitoring and Evaluation for the National Youth Development Agency. This money will be used for grants for young people whose business plans and ideas were approved. There are virements within departments that shifted money within their own budgets and different programmes.
Several departments rolled over funds from the previous FY in terms of section 30 of PFMA. For instance, DBE rolled-over R1.3 for the learner and teacher support materials in Eastern Cape and for special care centres in Northern Cape. The Department of Social Development rolled over R18.4 million for the operationalisation of substance abuse centre in the Northern Cape and finalisation of the construction of a substance abuse centre in the Free State. The Department of Energy rolled over R118.5 for procurement of an official vehicles; solar water heater project; non-grid oversight, monitoring and evaluation
Ms Modise pointed that Treasury was requesting the Committees to approve self-financing expenditure for different departments that generated revenue through the services that they provide. She pointed that if the self-financing expenditure is approved, the self-generated funds will be allocated to these departments. The following departments need approval for self-funding expenditure: Department of Communications (R 3.1 million); Department of Home Affairs for self-financing of R1.1bn generated from issuing of documents, Department of Correctional Services for R0.5 million from hiring out of offender labour. Other such departments are Department of Defence and Military Veterans, Department of Telecommunications and Postal Services and Department of Trade and Industry.
Ms Modise asked the Committees to consider and approve declared savings by departments. The Treasury declared a saving of R17 million primarily from the Jobs Fund. The Department of Public Service and Administration declared R6 million from compensation of employees, goods and services. The Department of Social Development declare R100 million due to the lower than anticipated take-up of the child support grant. The Department of Police declared R150 million for the implementation of the criminal justice system 7-Point Plan. The Department of Labour declared R12.4 million for compensation of employees. Department of Arts and Culture declared R43 million for heritage assets and goods and services.
At the beginning of the FY, the main budget appropriation was R814 billion. In total, the unforeseeable expenditure, roll-overs, self-financing, ear marketed expenditures and declared savings was R12 billion. Therefore the adjusted appropriations was R826 billion. However, there were other funds preserved for contingencies and drought relief. As a result, the 2018/19 appropriation was adjusted by R3.764 billion.
The Chairperson thanked Treasury for making it easy for Members to understand the changes to the budget.
Mr A Lees (DA) asked if the R59m virement for nuclear programme services had already been spent and the purpose of the funds. He asked if the R1.2bn to SAX was a loan or the government was buying shares in SA Express. If the money is not a loan it was important to assess if SAX can continue to operate. What is the projected revenue and expenditure for SAX for the next 12 months? The Committees should see the information that informed the decision to pay SAX. What was the revenue generated by the eight operating aircraft of SAX during October 2018? Can Treasury confirm that the operating expenses for SAX in October 2018 was R90 million? What is take up ratio of seat bookings both flown and in advance for the eight operating aircraft for October and November 2018? For the Committees to determine if the investment is good or bad, Members should be furnished with the information he had asked for.
Mr A Shaik Emam (NFP) was concerned about the increasing cost of debt service. He asked what the impact of debt service costs will be and Treasury’s plan to deal with the unsustainable debt service costs. What is the plan of Treasury to ensure that the money given to SAX will be utilised for the benefit of the airline? The Committees would like to know if there is chance to help the airlines. The problems being experienced by airlines must be dealt with holistically and not just by giving them more money when they are already in debt. The opinion from the airline was different from what Treasury says. Treasury should not only look at allocation of funds.
He asked Treasury to explain the impact of not spending money allocated to the Jobs Fund when there is high unemployment rate in the country. He asked if there is a plan to make Home Affairs sustainable from the money it generates from processing the many documents.
Mr F Essack (Mpumalanga DA) had concerns about the R30m spend on official state funerals. He needed clarity on the R100m to rehabilitate and reconstruct houses for human settlements and the virement of R126.9m for the South African National Defence Force and foreign military dignitaries. He asked why R150m was being transferred from the household programme to the Land Bank. How was the unforeseeable expenditure of R668.6m calculated?
Mr M Chabangu (Free State EFF) asked about the roll-over of R18m in the Department of Social Development to construct a substance abuse centre in Free State. He needed to understand how the money allocated to COGTA would be utilised in the former remote homelands that are susceptible to drought.
Ms D Senokoanyane (ANC) had concerns about the unspent funds in the Jobs Fund and asked why the money was not spent. It was not the first time money in the Jobs Fund was not spent. Was it because it was over budgeted?
The Co-Chairperson was worried about the increasing debt service costs and this should be addressed. He asked what was done with the money budgeted for the Jobs Fund, and the actual purpose of the money. He wanted to know the official who received the vehicle that cost R800 000.
Mr M Monakedi (Free State, ANC) asked if SAX was incurring expenses for the aircraft that are not operating. Was the money for SAX going to be used for the non-functioning aircraft to start operating?
Mr L Mzimande (KwaZulu Natal-ANC) expressed his concern about the unspent R100m for child support grants. Given the high level of poverty and unemployment in the country, government should be looking at how to support children who qualify for the child support grants. He asked if the SASSA system was not up to standard to ensure that the process of social grants is conducted smoothly. He was concerned about the R150m underspend in the Police Department, given the high levels of crime.
Ms Modise asked permission for Treasury and DPE to prepare a report on SAX and present the report at a later meeting. The Members' questions required a detailed report.
The Chairperson asked the Committees to consider the request made by Ms Modise
Mr Shaik Emam agreed to give Treasury time to prepare a report
Mr Lees was disappointed that officials were not ready to answer questions yet they were requesting approval for a lot of money to be given to SAX. The SAX matter is controversial and he would like to prepare written questions that must be responded to in writing.
The Chairperson stated that Members agreed and granted Treasury the opportunity to prepare a report. Treasury and DPE will be given time to present the report on SAX.
Mr N Gcwabaza (ANC) suggested that if time does not permit another meeting with Treasury, it could submit a written document through the Chairperson.
The Chairperson asked if the Members and Treasury agreed with Mr Gcwabaza’s proposal
Dr T George (Western DA) pointed out that it was unacceptable for Treasury not to answer questions when the Members took their time to attend the meeting. Members have to apply their mind effectively about the allocation of money to SAX, the answers should be provided timeously. Parliament cannot hold government accountable if officials are unable to answer questions. He expressed his disappointment as the people of South Africa should know how their money is being spent.
The Chairperson asked when Treasury should present its report. The Standing Committee on Appropriations will be considering the adjustments on Tuesday 27 November 2018. SAX will be part of the Committee Report on all the adjustments.
Mr De Beer suggested that the Treasury report must be ready by the morning of Friday 23 November 2018.
Ms M Manana (ANC) agreed with Mr De Beer’s suggestion.
Mr Monakedi suggested that the SAX Board should be present on Friday to answer questions.
The Chairperson agreed with him.
Ms Ulrike Britton, Treasury Chief Director: Urban Development and Infrastructure, replied that the R59m virement for the nuclear programme deals with the R200m allocated in 2016/17 to the Department of Energy for preparatory work. However DoE spent more than R200m and could not pay all the invoices of the service providers. The service providers ended up taking DoE to court. DoE found savings in the 2018/19 FY to pay for the 2016/17 invoices for work done.
The money for rehabilitation of house was for houses that were destroyed by floods and storms in KZN. Some houses had to be rebuilt while some needed only part reconstruction such as destroyed roofs.
The R800 000 for an official vehicle is a roll-over in DoE. It was to purchase a vehicle for the Deputy Minister of Energy whose vehicle had reached the maximum mileage limit. However, there was no vehicle available when the Deputy Minister needed one and DoE did not want to pay until the vehicle was received.
Ms Britton replied that there were unspent funds in Police Department as it changed the scope of the 7 Point Plan for the criminal justice system. The Police Department needed to go back to Cabinet when it changed the scope of the project but did not do so. As such, this would result in underspending.
The virement to the South African National Defence Force was for defence offices outside the country. The DoD under budgeted for the defence offices and there was a shift from goods and services.
On drought in the homelands, she replied that drought was declared in eight provinces which affected many municipalities and districts. The appropriations in the Division of Revenue Amendment Bill per municipality indicated where the money for drought relief was allocated. The appropriation for drought relief was allocated to all municipalities where drought was declared.
Mr Owen Willcox, Treasury Chief Director: Economic Services, replied that the virement transferred to the Land Bank, was due to the Departments of Agriculture Forestry and Fisheries and Rural Development and Land Reform changed model for providing agricultural support. In the past, support was in the form of grants to smallholder farmers. However, the funding will now go through the Land Bank to provide subsidised loans for farmers who have the capability to grow into commercial farming. The new model for agriculture support uses loans instead of grants to increase sustainability.
The Jobs Fund receives bids for funding of projects, and when the projects are approved, funding will be provided. However, conditions have to be met for a project to be funded. Given the poor state of the economy and investments, companies are not meeting their project milestones. As such, the Jobs Fund cannot pay if the project milestones are not met.
Ms Raquel Ferreira, Chief Director Budget Office: Expenditure Planning, Treasury, replied that every year there will be money allocated in the contingency reserve for unforeseeable and unavoidable expenditure according to the provisions of PFMA. Treasury regulations specify what qualifies as unforeseeable and unavoidable expenditure which is spending that was not known at the time the budget was planned.
During the course of the each FY, departments are given an opportunity to put forward requests if they had unforeseeable and unavoidable expenditure. The requests will then be given to the Minister of Finance and Committee on Budget to determine if they meet the requirements of the PFMA and regulations.
In the 2018/19 FY, the unforeseeable and unavoidable expenditure consisted of post-disasters, reconstruction and rehabilitation of houses, schools, farms after floods and official state funerals. In total these unforeseeable and unavoidable expenditure amounted to R668.6 million.
Ms Julia de Bruyn Chief Director: Public Finance, Treasury, said the roll-over in the Department of Social Development (DSD) for the construction of a substance abuse centre was for money that could not be used in last year’s budget. The construction of the centre could not be completed. On the unspent money for child support grants, DSD over projected the number of children who would qualify for grants. As a result, the money allocated for child support grant was over budgeted.
Ms Modise replied that the reason Home Affairs is given the self-financed money is to ensure that it is sustainable. R1.1bn was self-generated through processing IDs and passports but this was insufficient to cover the Home Affairs overall budget of R7.9 billion. There are other functions performed by DHA that cannot be charged for. The reason the money is given back to DHA is to ensure it modernises its services
She replied that every year money will be budgeted for state funerals for the Department of Public Works (DPW). It is impossible to predict a funeral although Treasury allocated R10m for state funerals for the whole year. There were three state funerals and the DPW used the 10m. Treasury ensured that the department adhered to cost containment requirements provided by Treasury. The R30m was calculated based on the cost containment measures to fund the funerals.
Mr Anthony Julies, Deputy Director General: Assets and Liability Management, Treasury, said the debt service costs is affected by the currency exchange rate fluctuations. For instance, the assumption made in February 2018 was that the R1.60 exchange rate to the US dollar will increase the debt by R33 billion. The Value Added Tax refunds accelerated the debt.
The reason for the switch and tender offer is to allow government to manage refinancing risk resulting from upcoming redemptions of bonds. In 2009, debts were switched due to the financial crisis. If debts were not switched from 2009, the current debt would be huge. The longer the maturity rate, the higher the cost of servicing the debt. Treasury issued a foreign bond worth US$3 billion. However, investors were interested to take up the money. Treasury made a decision based on cost and refinancing on whether to continue with the US$3bn foreign bond. Treasury found that it would get a good return if it issued a foreign bond of US$2bn. Consequently, there is US$1bn for foreign bonds which will be brought forward to the next FY. There is US$1bn more than what Treasury planned. He mentioned that the GDP has an impact on the debt and debt servicing costs.
Mr Chabangu said he is unable to attend the meeting on Friday and it is unacceptable for officials to come to Parliament and fail to account for money.
The Chairperson said the matter had been dealt with and Members had already agreed. If Members have questions, these must be directed to the specific departments.
Mr Chabangu asked where the substance abuse centre is in Free State. The construction of the Winnie Mandela museum in Free State has not been completed. Is Winnie Mandela’s house in Free State now a national monument?
The Chairperson reminded Members that some questions must be directed to the specific departments. The Department of Arts and Culture is the one responsible for the Winnie Mandela house project.
Mr Shaik Emam said Treasury is the custodian of all government funds and he was not impressed when Treasury defended departments. Treasury has a role to play and should take responsibility for the money wasted on the Integrated Financial Management System and the VBS Bank looting. The previous Treasury Chief Operations Officer estimated that South Africa loses R200bn a year. This means something is terribly wrong and must be addressed. How are we going to change that?
Treasury must motivate and convince Parliament why money should be given to SAX. What is the role of the Civil Aviation Authority in the challenges faced by SAA and SAX? Routes are being given to everyone yet SAA and SAX do not have enough routes. Having many airlines flying the same route will have an impact on the operations of an airline.
Mr Shaik Emam asked what can be done to reduce the debt service costs given the unpredictable currency exchange rates. Does Treasury have a plan to address wasteful expenditure across government departments.
Mr L Gaehler (Eastern Cape UDM) said the Committee should get answers from the Department of Human Settlements (DHS) if the houses were destroyed due to sub-standard work. Many houses are destroyed but no one is held accountable. DHS must provide a report on the causes of the destruction.
Mr Gcwabaza asked Treasury to clearly explain if the R30m for state funerals was used in the current or past FY. The impression given by Treasury was that one state funeral cost R10m. The short answers made it difficult for Members to understand. The R30m for state funerals had to be justified.
Mr Gcwabaza was not happy with the answer given on the Job Funds. In the past three years, over R180m was shifted from the Jobs Fund. How much was remaining in the Jobs Fund between now and the next budget. Was there now no money in the Jobs Fund which could be utilised to create jobs.
The Chairperson asked if there a policy on state funerals as there had to be one.
Mr Gaehler asked if there is a budget for state funerals and from where the money comes.
Mr Lees said it is impossible to forecast funerals. He was concerned about the virement of R59m given to the DoE for nuclear programme. The DoE had a budget of R200m for the nuclear programme but spent R259 million. Why was R59m spent without special approval? He wanted to understand how DoE spent more than it was allocated and without parliamentary approval.
The condition for the R1.2bn allocated to SAX was to pay existing debt. He wanted confirmation that the money will not be used for current expenditure. He asked how much SAX owes to ABSA Bank and for a breakdown of SAX debt.
Ms Britton replied that the Civil Aviation Authority is a safety regulator responsible for ensuring that aircraft are safe. It is not a regulator of airline routes or prices but only deals with aircraft safety and that the pilots are equipped to fly.
Mr Shaik Emam asked who approves or allocates licences for routes.
Ms Britton replied that the Air Services Licensing Council under the Department of Transport is responsible for issuing licences for airlines to operate specific routes.
Ms Britton replied that Treasury was concerned about the virement of R59m and DoE spending more money that it had and taking more than a year to honour its commitments. The R59m was deemed by the Auditor General to be irregular expenditure. As such, DoE asked Treasury to assist in paying its liabilities. When the liabilities have been paid, the amount will be deemed irregular expenditure if the management, regulation, procurement and payment of the contracts were not properly done. However, section 43 of the PFMA allows an accounting officer of a department to shift money within the same department. The parliamentary approval is required for the shift of R52.2m of the total R59 million.
Ms Modise are several things Treasury is doing to minimise wasteful expenditure and corruption in government. Treasury implements cost containment measures and is in the process of finalising the Public Procurement Bill. The Public Finance division in Treasury is responsible for monitoring and reporting financial expenditure of departments to the Standing Committee on Appropriations. Treasury reports financial performance of departments on a quarterly basis.
She did not want to give an answer about what can be done to reduce the debt because she did not have full information. However, the answer lay in the overall economic performance of the country.
There is policy on State Official and Provincial Funerals published in 2016. There are different categories of funerals and because of the categories, the funding allocated is different. Therefore it is not true that one state funeral cost R10m because in 2017/18 there were three funerals of different categories. The three funerals were for Winnie Mandela, Billy Modise and Zola Skweyiya. She reiterated that it is difficult to budget for state funerals. As result, DPW applied for the funding but it was not budgeted for as those funerals took place after the budget had been allocated. R10m is allocated every FY. However, if there are more funerals, DPW will apply for more funding and avoid shifting its money from other programmes to state funerals. When the budget for state funerals is not enough, Treasury will allocate more money from contingency reserves.
Mr Julies replied that Treasury had introduced an electronic trading platform to address the increasing debt servicing costs. Treasury moved from the over-the-counter system to an online trading platform for issuing bonds. There are more than 1 700 transactions listed on the trading platform whose value is over R2 trillion. This is important for increasing transparency, fairness and allowing better pricing for the bonds.
The Chairperson thanked Treasury and asked Members to submit written questions to the Secretary so they can be forwarded to Treasury.
South African Airways Special Appropriation Bill
Mr Anthony Julies, Deputy Director General: Assets and Liability Management, Treasury, noted that during the 2018 Medium Term Budget Policy Statement, the Minister of Finance stated that government would provide additional funding for SAA and SAX to support a sustainable reconfiguration of the airline portfolio.
SAA incurred losses in eight out of the previous 11 years since the airline was unbundled out of the Transnet Group in 2007. SAA operating costs model needs to be revised because operating costs have consistently exceeded its revenues. This has led to the deterioration of the SAA financial position and an increasing reliance on government support. SAA is insolvent because its liabilities exceed its assets and shareholder value is negative
SAA was initially granted guarantees of R1.3bn in 2007. SAA’s government guarantee facility is currently R19.1bn and the airline has been relying on government guarantees to obtain loans to fund its operations. SAA has R5bn in a government guaranteed debt facility that is maturing during the 2018/19 FY. SAA will not be able to repay its maturing government guaranteed debt of R5bn without recapitalisation by the shareholder. This means that the failure by the airline to meet its guaranteed obligations will result in a call by the airlines’ lenders on SAA’s entire guaranteed obligations of R16.7 billion.
In the 2017/18 FY, SAA was recapitalised with R10 billion. When the amount was provided, SAA was asked to meet certain conditions. One of the conditions was that the airline must provide an implementation plan for its five-year turnaround, approved by the Board and submitted to Treasury by 30 December 2017. However, SAA board requested an extension to 31 January 2018. The other conditions were that SAA must achieve at least 90% of the outputs outlined in the implementation plan by 31 March 2020 and that a Chief Commercial Officer and Chief Strategy Officer be appointed by 31 January 2018. All these conditions were met.
Due to the poor financial performance of SAA, a special appropriation bill was prepared. The airline projected that it will incur losses during 2018/19 and 2019/20. The main reasons for losses and poor performance are: lack of commercial skills; lack of focus on certain key levels; lack of stability in executive management positions and restrictions on decision making placed on management. SAA’s projections indicate that the airline will return to profitability in 2020/21. Given SAA's ongoing liquidity challenges, government will have to recapitalise the airline. The proposed R5bn recapitalisation for SAA to repay its maturing government guaranteed debt facility is aimed at signalling government’s commitment to support the airline to achieve financial sustainability. Future options being explored with the private sector are joint ventures and strategic equity partnerships.
Mr Julies said that Treasury proposed a R5bn appropriation to DPE to settle the debt due by SAA. The Bill requires the DPE accounting officer to transfer the amount to SAA in portions and on such dates as determined by Minister of Finance. If there is any part of the amount not transferred to SAA by 31 March 2019, that part will revert to Treasury.
Co-Chairperson, Mr C De Beer (Northern Cape, ANC), thanked Mr Julies. He urged Members to ensure that they exercise their oversight responsibilities on SAA. He asked DPE to a make brief comment on SAA.
Department of Public Enterprises (DPE) on SAA
Ms Avril Halstead Acting Deputy Director General: Transport Enterprises, noted that on 1 August 2018, the executive authority over SAA was transferred from the Minister of Finance to the Minister of Public Enterprises. The Minister of Public Enterprises has met with the SAA board and executive to evaluate its turnaround plan and monitor its progress and implementation.
The Minister visited SAA facilities two weeks ago and held a briefing with staff. The SAA board was given a mandate to ensure that the airline becomes sustainable. The Minister will be meeting the Minister of Transport to discuss civil aviation policy and air rights.
When the Minister Gordhan met with SAA he highlighted the need to fight corruption and encouraged employees to report anything unlawful within SAA. DPE is in the process of establishing a whistleblowing hotline to enable employees to report malpractices in a confidential manner. The previous Chief Financial Officer and Acting Chief Operations Officer were dismissed and currently 14 employees are on suspension. SAA is still investigating the matters.
The appointment of the new senior executives at SAA is starting to bring stability to the airline management. However, there are some vacancies on SAA board that are still being reviewed by the Minister. Despite the the appropriation of R5 billion funding to SAA, the airline will still be insolvent. Ways to inject funding into SAA must be looked at and DPE is considering entering into a strategic equity partnership. However, given SAA loss making position and insolvency, it is it unlikely to optimise value from selling. Bringing a strategic equity partner could increase opportunities such as strengthening markets, management skills, capital and strengthening governance.
South African Airways (SAA) turnaround strategy implementation
Mr Vuyani Jarana, SAA Chief Executive Office, said that SAA revised its strategy and turnaround plan to build a commercially focused airline with customer experience as its cornerstone. The approved FY 2019-23 Corporate Plan indicates that the airline will become profitable after 2021 because the airline will continue to incur financial losses of R5.2bn and R1.9bn for 2018/19 and R1.9bn for 2019/20. However, the SAA board is committed to implement the turnaround strategy. The SAA Corporate Plan is exposed to significant environmental and execution risk, driven by lack of critical skills, weak balance sheet, liquidity challenges and escalating oil prices, among others.
The SAA strategy is to be the leading airline domestically and regionally. There is service offering strategy for Mango and SAA and a hybrid strategy for both airlines. In the international domain, SAA intends to operate routes that are profitable and abandon routes that are not profitable. The implementation strategy entails cost efficiency, building civil aviation skills and ensuring an enabling policy environment.
However, if SAA is not assisted with the requisite funding at the right time, it will be difficult to implement the strategy. Some risks that may affect the implementation of the SAA strategy are: inability to get access to credit lines, significant oil price increases, shareholder shifting focusing from building a financially sustainable airline to a development airline, labour unrest, failure to finance long term goals and lack of management capacity. The biggest risk is uncertainty about SAA’s future sustainability due to it being sensitive to markets.
Mr Jarana said that the SAA will change the organisational design to focus on profit and loss accountability. This means that all domestic, regional and internationally business should deliver profit. This model is currently being implemented. The long term turnaround strategy leverages a structured approach consisting of four phases. The first phase focuses on cost management, core activities of SAA, network and route profitability, customer engagement, management and organisation accountability. The second phase will focus on optimising revenue and customer service and fleet alignment. The third and fourth phases will focus on stabilising markets and growing the organisation.
Currently the SAA board and management is implementing the first stage of the turnaround strategy. The airline is focusing on stimulating revenue and optimising networks through flying profitable routes, and aircraft utilisation. Management started to take key decisions to optimise the cabin crew and pilots. Management is outsourcing a total of 122 pilots around the world with an intention to recall them. These initiatives will assist SAA to save R400m in a year. Moreover, it is reviewing the supply chain policy and South African Airline Technical (SAAT) business logistics processes to ensure that SAA aircraft are serviced and maintained efficiently and at the right price.
These initiatives are starting to yield positive results and revenue is improving. Through implementation of the turnaround strategy SAA is now generating revenue both domestically and regionally. All domestic routes are showing positive results except Port Elizabeth. All regional routes are yielding profits except Entebbe.
The international routes have not yet started to yield positive results. The Washington DC and London Heathrow routes are some of the international routes that are starting to yield profits for SAA while routes like Hong Kong have not been profitable. The oil price is a major challenge facing international routes. Most of the international flights operate on forward bookings and it may be difficult to recover the fuel cost when passengers have already booked their tickets in advance of the fuel increase.
SAA half year performance results
Mr Deon Fredericks, SAA Chief Financial Officer, said that there was an increase of revenue in the second quarter of the FY due to network changes. Further, there was an increase of average seat kilometre. Against the plan, SAA’s average load factor increased by 1 percent while the average fare increased by 10 percent. Despite these positive results, there were challenges in meeting the operational costs plans due to fluctuating currency, labour costs, oil price increases and capacity challenges of SAAT to repair aircrafts.
He pointed that the only way to be successful in business is to have certainty. The negative news in the newspapers have significantly affected SAA’s business because investors will not invest and the right people with skills will not be interested in working for the airline. People perceive it to be a high risk to do business with SAA because of no money in the airline. The airline’s negotiating power is significantly reduced because of inability to raise revenue and the banks are not willing to finance the airline. In the past, when there was negative news that SAA will be closed, the airline lost R500m in forward bookings. The SAA management is working to create the business flexibility and certainty.
The Co-Chairperson thanked SAA. He said that the former Minister of Finance once said that SAA is considering bringing in an equity partner. He asked the SAA board to provide information on the proposal to engage an equity partner. The Committee would like to see SAA succeeding and becoming profitable.
Dr T George (DA) was not happy about the SAA strategy to turnaround the airline because the officials had not considered exchange rate expectations given that it is one of the risks faced by the airline. What do you have in mind for the exchange rate and the impact on the oil price? He had expected the presentation to have an analysis on competition and what would happen if SAA faces competition from other airlines. He did not think that SAA would secure an equity partner considering its current financial position. If the Board considers selling SAA, they should ensure that taxpayer money is not used inappropriately to benefit others.
The Co-Chairperson said that when Minister Gordhan visited SAA, he expressed his commitment to fight corruption. He hoped the SAA board would cooperate and assist the Minister in this fight.
Mr M Shackleton (DA) said the Committees should be very careful in weighing the competing interests of a struggling economy against the impact of R5bn being appropriated to SA. SAA has approached the government for a bailout of approximately of 30bn over the past years. He was worried that SAA would continue getting bailouts. He wanted to know the difference between SAA’s old plans and the new turnaround plan and why Parliament should believe the Board.
There are many risks identified and he was concerned that the only solution would be to approach Treasury for further bailouts. He asked if it is true that SAA has a higher ratio of personnel than other airlines and if the executive was considering restructuring so operating costs can be reduced as well.
Mr Lees thanked the SAA CEO and asked to see the SAA annual financial report. Treasury acknowledged that SAA is insolvent which means that it is trading recklessly in terms of Section 22 of the Companies Act. He asked if Treasury agreed that in terms of section 77(3)(b) of the Companies Act, the SAA directors should be held personally accountable and if not, why not.
He asked Treasury to explain the SAA debt that needed R5 billion. Was the R5bn to pay a loan on the basis of the Finance Minister's letter stating that SAA would be provided with additional financial support. If that is the case, on what authority did the Minister of Finance commit Parliament to approve the R5 billion? He asked the due date of the debt payment and the interest rate. Has the money already been spent?
The previous SAA board used to give the Committee more information. However, the current board had not provided full information on how the R5bn will be spend and how the executive intends to turnaround SAA and SAX. He asked for a full report on SAA and SAX debt, the applicable interest rates, maturity dates, and the lenders and loans provided to the airline. He asked if Treasury would reduce the government guarantee available to SAA if Parliament approves the appropriation of R5 billion.
Mr Lees was worried about the relationship between SAA and SAX. The SAX bookings are done through the SAA system. He asked if SAA owes SAX money and how much. SAA could be owed a lot of money and he wanted to find how much SAX receives from ticket sales booked through the SAA system. He asked if the SAA shareholder passed a resolution to authorise the payment or transfer of money to SAX as required by section 45(3) of the Companies Act.
He asked if the SAA board confirmed the solvency and liquidity test when it approved financial assistance be given to SAX. Was a notice given to SAA trade unions informing them about financial assistance for SAX? Would SAX be able to repay the money to SAA given that it has only eight aircraft operating. What is the SAA market share of the Joburg-Heathrow route and capacity share? What is the market share of the one aircraft operating the Joburg-Heathrow route? He asked for the number of SAA aircraft engineers who retired in the past year.
He thanked the SAA CEO for being honest that SAA was facing financial problems and losing customers. He asked if it is possible to turnaround SAA given that it is losing technical skills and does not have the requisite funding. He also asked how much the SAA board earned.
Mr Shaik Emam did not agree with the strategy of the SAA board and believed that the board is setting up SAA for failure. The board is not doing their best to solve SAA’s financial crisis and the board only concentrated on getting bailouts. Getting bailouts from government will not solve the problems of SAA. Do we want SAA to work or to be privatised? Does the SAA board have a plan to ensure that the airline will not shut down. He asked the board what government can do ensure that SAA continues operating sustainably.
Was the board of the view that getting an equity partner is the best model to restructure SAA. Would the board consider airlines like Ethiopian Airways as an equity partner to collaborate with SAA?
He asked how much money government received from selling some of the SAA fleet and where the money went to. He asked about the impact of selling the fleet which now SAA is leasing. Had the board reduced the number of SAA employees since it reduced flying frequency and the number of the routes? He asked if the call centres located around the world are still in existence given that some routes were cancelled. In addition, was SAA experiencing challenges with employees and unions?
Mr Shaik Emam asked about Mango given the pricing differences between Mango and SAA. Most Members of Parliament use British Airways because it offers better services for their customer than SAA. For instance, if a customer wants to change their flight, SAA is not willing assist but British Airways will change flights for its customers anytime.
He asked if the Committee should encourage SAA to utilise another service provider and not SAAT for repairing and maintaining aircraft. He asked if fuel was not a problem for everyone and not just SAA. He asked why SAA discontinued the SA-India route which was profitable.
Moreover, he asked if the board had a strategy to sell SAA to private companies so that it can start operating efficiently. Can you tell us how much you need to turn SAA around and become profitable? When will SAA be able to repay the guarantees that it has been receiving from government and private sector.
Mr T Motlashuping (North West, ANC) said the turnaround strategy gave him hope that SAA is moving in the right direction. However the strategy has too many long term goals and targets. He asked if the SAA board could look at what is achievable in the shortest period of time. He wanted to know the impact of having an ageing aircraft and workforce. Why did SAA discontinue the Mumbai route because it was one of the most profitable? A business wanted to take it away from SAA. He said the airport in North West was unused.
Mr Gcwabaza asked about the SAA office in Miami as it has nothing to do with SAA. He asked if it was true that there are retired pilots in Johannesburg who are still being paid for consultant work. He asked about the SAA Human Resources Policy and how the policy is being implemented. He asked for the ratio of office staff and costs. Retrenchments are very sensitive when there is high unemployment. What is draining SAA finances within HR and why?
Mr Gcwabaza asked if SAA’s liquidity challenges would be resolved if government were to give SAA R7.6 billion. If R7.6bn was not enough, what is the actual amount required to turn SAA around. What is the actual amount required to clear the debt and all financial challenges of SAA? The SAA board has been changed many times and he believed that the current board is the best team but must be assisted.
He said that whistleblowing does not help to avoid or stop corruption unless DPE is proactive and investigates corruption. He urged DPE not to do selective investigation. DPE must not absolve itself but be proactive so that workers will be encouraged to whistleblow.
Mr Gcwabaza disagreed with Members who suggested SAA must be sold. The DA will not get SAA to be sold. Government does not have a policy for selling SOEs. South Africa recently signed the African Continental Free Trade Area which will boost tourism and South Africans must support SAA by flying SAA.
The Chairperson asked how SAA will receive the money transferred to DPE if it is not reflected within the DPE
The Co-Chairperson asked if DPE has a plan to inject funding into SAA.
Mr Jarana replied that to be sustainable SAA needs money and a partner who will assist with skills, innovation and financial investment. There should be something more than just financial assistance. On the exchange rate, SAA projected five years for its turnaround strategy. Within the SAA revenue portfolio, there is a natural hedge between foreign exchange rates and the cost of oil. SAA projected that in 5 years, the exchange rates would have moved by 13.5 percent on average. He pointed that all the indicators are critical but the most important is the exchange rate and oil price.
Mr Jarana replied that during the first two meetings of the SAA board with the Committee, the board shared its strategy. The difference between the strategy of the new board and the old ones is that the new board understands what SAA needs to be sustainable. The new strategies devised by the new board are good but its success would depend on execution. SAA needs an alignment of purpose between all partners, board, management and shareholders. Another difference is that the board is making hard decisions that were not made in the past to ensure that the airline is revived.
He replied that SAA’s financial statements are available for Members to see. However he emphasised that the funding crisis should addressed. SAA belongs to government and the board must be accountable to Parliament. However, if funding is not provided, it will be difficult to implement the plan. He emphasised that SAA can be fixed but all players should be working towards the same goal. SAA’s cash flow statements are available for Members to go through and would be provided to the Committees if required to do so.
The Co-Chairperson asked Mr Jarana to submit the financial statements later.
Mr Jarana replied that SAA has not done any pre-payment to SAX because all franchises are treated in the same manner. However, he needed to investigate that and report to the Committee.
On the market share on the Joburg-Heathrow route, he would investigate and report to the Committee at a later date. However, SAA reduced its frequency from 5 to 2 but British Airways is now increasing its flying frequency. He repeated that the SAA strategy is to become sustainable, as such it is not helpful to aspire to be big when the airline is not big enough. The airlines operate as alliances of partners to feed into each other. The majority of London passengers are fed into SAA by its partners. The new strategy is starting to bring positive results because there is now an 88% load factor.
Mr Jarana replied that SAAT has good technical skills, however the challenge is how to manage the ageing workforce and bringing new skills. If a competitor comes into the market, the competitor many take some of the workforce from the incumbent. Thus the board is focused on how to retain technical skills. There are some SAAT employees who were taken by competitors.
Mr Jarana did not have the exact figures SAA owed to Absa Bank but he would report this after investigating.
Mr Jarana restated that the SAA board is clear about what the organisation needs. SAA needs skills, government support and funding. The board projected in the plan that to turn around SAA, R21.7bn must be injected into the airline. The R21.7bn consists of R9.2bn to cover old debts that will mature next year in March and R12.5bn for working capital. SAA is a state asset and management are the stewards on behalf of shareholder. He reiterated that there should an alignment of roles between the government shareholder and management. While it is critical to hold each other accountable, all stakeholders must not lose sight of accelerating the implementation of the strategy.
Mr Jarana said SAA conducted a study about the financial implications of the call centres including the one in Miami. Airlines have a pre-body support to carry out simple transactions which are usually locally focused for clientele services. SAA is integrating all call centres to ensure that all customers can be assisted efficiently and in the shortest possible time. The Miami call centre support is not only for America but the whole of the North American region including Canada. The Miami call centre is a trade support and not a classical call centre. The information on the analysis of SAA call centres would be provided to Members.
Mr Jarana replied that the India route was stopped because it was not profitable according to the report given to the SAA board on all routes. However, he stressed that an analysis of the route by a forensic team could give different results. The report could be provided to Members to read.
The Co-Chairperson asked if Mr Jarana could reply in writing due to time constraints. When the SAA Annual Report for 2017/18 is submitted to Parliament, the two Committee would have to deal with the Annual Report because the Committees were considering the Special Appropriation Bill.
Ms Halstead stated that the DPE has confidence in the turnaround plan as it focuses on revenue stimulation, network optimisation, restructuring the organisational design, reviewing supply chain and the SAAT business process. DPE is of the view that these are the items required for the turnaround of the airline. Nevertheless, Members could suggest other items that may assist the airline to be profitable
The stabilising of the board and management who are actively taking decisions to implement the strategy and the turnaround plan is showing positive results. The profitability of domestic and regional routes improved significantly compared to previous years. Nevertheless, there is still a lot of work to be done on international routes. DPE is currently considering that matter and believed that the turnaround plan will improve SAA operations if implemented.
Ms Halstead reminded the Committee that SAA will continue to make a loss of about R5.1bn even if the turnaround strategy is implemented. The airline will only start to make profit in 2020/21. In the past SAA would make a loss of more than R5bn and these losses eroded the airline’s liquidity.
She pointed out that the SAA annual financial statement are available on its website and Members are free to get the information. At the end of 2016/17, SAA liabilities were at R17bn against its assets. In 2017/18, SAA recorded a loss of R5.5 billion. In 2018/19, SAA projected a loss of R5bn and R2bn in 2019/20. She emphasised that even if SAA is given the R5 billion, it will only assist SAA in repaying debt coming due before March 2019. The airline will still be insolvent. Treasury is aware of the liquidity challenges of SAA because they were informed by DPE and Treasury was the SAA shareholder until the beginning of August 2018. However, in the current economic position, Treasury and DPE agreed that it would not be possible to allocate R21.7bn to SAA at once. Thus DPE will be expecting a phased allocation of funding over time.
The R5bn may help to solve the current liquidity challenges but DPE does not expect any equity partner coming to assist SAA because of its insolvent status. DPE hoped that if the R5bn is approved, the airline may be able to get a strategic equity partner. DPE wants to optimise the proceeds that may be realised from selling SAA, however at the moment, it is impossible. DPE is looking at how to financially assist SAA. DPE is interested in getting a strategic partner that brings in management skills, airline business process and expertise.
Ms Halstead stated that Treasury regulations set out the process that should be followed to conduct an investigation on corruption or financial misconduct. According to those regulations, the board has a duty to conduct the investigations. However, DPE is of the view that the SOE boards are failing, so DPE will have to step in and assist the boards. DPE has been working with the boards of all SOEs to ensure that they conduct forensic investigations on allegations of corruption. Currently there are investigations being conducted by the SAA board and due process is being followed. The SAA board has been proactive and 14 people were suspended within the SAA procurement division.
However, DPE does not want to overlook other areas where corruption could be taking place in SOEs. As such DPE is calling on employees and the public to report any misconduct through the hotline. DPE will be conducting investigations on allegations with respect to SOE board members or department officials.
On 1 August 2018, there was a presidential decision to move SAA from the Minister of Finance back to the DPE. So from 1 August 2018 SAA became one of the SOEs under DPE. When the R5bn is approved, the money will be transferred to DPE so that it can be allocated to SAA.
Treasury said that SAA has a R19.1 billion government guarantee – R14.5 billion of which has been used. SAA has R14.2 billion of repayments due by March. In 2018/19, government is allocating R5 billion to help repay this debt. The remaining part of the debt is a guarantee provided to the Air Traffic Licensing Council for forward bookings. The debt to Air Traffic Licensing Council is technically not a guaranteed debt.
Mr Julies replied that the budget vote transfer for SA from Treasury to DPE will not be in 2018/19. However, in the 2019/20, SAA will be included under DPE financial statements.
The Chairperson said SAA does not appear in the DPE system now even though it has been transferred.
Ms Ferreira replied that the funding was moved to DPE in the adjustments of national expenditure. Thus, the R5bn will be in DPE financial statements and not Treasury.
The Co-Chairperson asked if the information could be given to the Committee in writing.
Mr Julies stated that there is no commitment by government to pay SAA's debts. However, government provided a guarantee against which SAA is raising funding. Considering that the process of budget allocation takes long, Treasury decided to prepare a special appropriation for SAA because the debt is due on 30 November 2018. The question on loans should be directed to SAA.
The Co-Chairperson asked him to provide answers in writing because the Committee had another meeting.
The Chairperson thanked Treasury and DPE for briefing Committees. The objective of the meeting was achieved but Members still wanted to continue engaging with Treasury, DPE and SAA. The Committees would make an informed decision on the Appropriation Bills. She reminded Treasury to submit written responses by Friday 23 November.
The meeting was adjourned.
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